6 Areas To Inspect If Your Nonprofit Has Financial Problems

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Business woman on laptop reviewing her nonprofit financial problems

All nonprofit board members should know how money flows through their organization. Why? It helps them monitor financial operations more accurately and reduce the risk of fraudulent or dishonest acts. If your nonprofit is experiencing financial problems or wants to find areas for improvement, look into these six items.

They’ll reveal how money goes in and out of your organization, and everything in between.

1. Revenue sources

Many nonprofit organizations follow different financial models. Each model has strengths and shortcomings.

As a board member, you should know where your organization’s money comes from. What are all your sources of income? Do you know if your organization is at risk due to limited funding? Pay attention to revenue.

Common revenue sources include:

  • Government funding – Many nonprofits receive nearly all of their funding from government programs. If this is true for your org, it may risk losing resources when there’s a change in political leadership. If government resources, allocations, or priorities change, how does it impact you?
  • Foundations or individual donors – Some organizations rely on the support of a single charitable foundation or a generous individual or family. If your organization relies too heavily on a single revenue source, it’s cause for concern. What if something happens to this donor? What if the foundation scales back its donations? It could seriously threaten your organization’s future.
  • Endowments – Large nonprofits may have an established endowment. This is an investment fund that’s funded by tax-deductible donations. Your organization might use interest income from its endowment to fund operations or other activities. If interest income drops, how do you maintain funding for those activities?
  • Program revenue – Other organizations receive funds from their patrons in the form of fees, membership dues, or ticket sales. But, it’s rare for these types of funds to cover the entire cost of services the organization provides to fulfill its mission.

 

2. Donor restrictions

Your organization should be able to provide a proper, comprehensive overview of how it uses donations. It needs to have a system in place to handle restricted donations correctly.

These types of donations are earmarked for specific purposes. Your system should ensure they’re used appropriately.

 

3. New programming

When your nonprofit organization considers starting a new program, the board must help think through the implications. Ask good questions.

Does this new program enhance your organization’s mission? How will you fund it? Self-funding? Ongoing contributions?

Having an honest dialogue within your organization will help evaluate the potential of new programs and the effectiveness of current ones.

 

4. Fundraising

Before you ever join a board, you should know what fundraising expectations the organization will have for you. You may be asked to host a table at a charity event, call potential donors, or volunteer to at various fundraising events.

Once you’re on the board, you should always know if fundraising activities will provide a sufficient return on investment. And, if they’ll enhance your visibility in the community.

Plus, it may be difficult to ask others to contribute to an organization when you haven’t made a personal financial commitment. Your organization may be flexible. Or, it may require a predetermined contribution amount from each board member.

You may be able to hit this mark through a personal donation or by soliciting funds from other sources.

 

5. Accounting controls

To ensure your organization is sustainable and can prevent fraud, it needs to have effective accounting controls.

Typically, small organizations rely on one person to handle all its financial functions. (S)he is receiving funds, paying bills, processing payroll, and more. This increases the risk of fraud. And, it can lead to problems when this person goes on vacation, is unavailable, or leaves the organization.

Does your nonprofit fit this description? You may want to consider having your board treasurer or another knowledgeable volunteer take on some tasks to divide responsibilities.

Large organizations usually have a bigger team of financial professionals. This team should have a system of controls built into its processes, again, including segregation of duties.

For all nonprofits, but especially smaller operations, outsourcing your accounting functions and payroll needs may be a solution. You can engage third-party experts to handle financial processes and ensure the appropriate checks and balances are in place.

 

6. Audits

Boards will often ask an accounting firm to prepare financial statements. However, not all circumstances require an audit. In many situations, a less extensive review or compilation is sufficient.

An audit may be needed when your organization’s bylaws require it, or when one of your significant funding sources requests it.

If you’re a Michigan-based nonprofit, you’re required to attach audited financial statements to your renewal solicitation form when your contributions and net income exceeds $525,000.

If your contributions fall between $275,000 and $525,000, you must attach financial statements that a certified public accountant reviewed or audited.

 

Identifying and correcting your nonprofit organization’s financial problems isn’t simple. And, it’s not a one-time project.  You should consistently monitor it’s flow of money, know which metrics matter, and find ways to optimize. This level of involvement can help alleviate financial issues, prove that your organization is efficient with its funding, and help make your organization more attractive to additional revenue sources.

 

Have questions about your nonprofit and its financial situation? Let’s talk!